Descriptive case study
Emirates Airline Case Description
Emirates airline is ranked the largest airline in the entire United Arab Emirates. This airline that was founded in 1985 is equally ranked as the fourth largest in the world in the number of passengers that the airline transports annually as well as its capacity. The major competitors of Emirates in the Aviation industry include Etihad, Qatar Airline, and Turkish airline. Heavy governmental regulations in the Middle East have greatly impacted on the Emirates airline’s efficiency and profitability. These regulations have limited the number of flights of the airline as well as the number of destinations that the airline can fly to. The growth of the United Arab Emirates from a global perspective exemplifies the effectiveness of the Open-air policy that the United Arab Emirates has operationalized.
Emirates have undertaken several partnerships with other airlines in the previous times. For instance, Emirates partnered with Quintus airline in 2012. This was the first partnership that Emirates was getting into and hence became a landmark partnership for both the Emirates airline as well as the overall aviation industry. Secondly, the Emirates airline also collaborated with the Malaysian airline. This partnership was guided by the Etihad airline’s interest in Malaysia. It is imperative to note that Etihad was a major competitor to Emirates and hence its interest was a threat to the Emirates’ market in Malaysia. The informed Emirates Decision to collaborate with Malaysian Airline.
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Etihad Airline Case Description
The Etihad airline is equally one of the largest airlines in the United Arab Emirates. United Arab Emirates Government established the airline in 2003 and solely owns it. It serves as the national carrier in the United Arab Emirates and has its hub in Abu Dhabi where its operations are centralized. Etihad airline has tremendously grown over a short period to be among the largest players in the aviation industry not only in the United Arab Emirates but also from a global perspective. The airline boasts of over 104 commercial aircrafts and undertakes about 1,300 weekly to different destinations globally such as middle east, Asia, North America, Australia and Europe. The success of Etihad can also be attributed to the several strategic partnerships that the airline has had in several regions globally (Pontus, 2015). These partnerships have not only helped the airline to expand its capacity but also to expand its market and reach regions it would have ordinarily not been able to reach. The major Competitors to Etihad airline include Air India, Emirates, Malaysia airline, Qantas airline, Qatar Airline, British airline and Turkish airline among others.
The Etihad airline prides itself on providing reliability and comfort to customers. Therefore, the airline targets passengers with high preferences for comfort and reliability. The major customers for the airline include corporates, middle class as well as the upper middle class. The airline reaches over 55 destinations in different countries across the globe. The airline offers exclusive high-quality services and is majorly concerned with the quality of customer care as well as exclusive launches and in-flight entertainment.
Emirates and Etihad airlines in the United Arab Emirates have competed for an extended period. The two airlines serve the same travel market, and hence their competition is based on their ability to outdo each other and maintain a significant portion of the market share. There have been rumors since 2008 about the possibility of the two airlines to merge and create a single airline for the UAE. Although the management of both carriers has since dismissed the claims, the chances of such mergers cannot be ruled out. In October this year the, UAE’s president hinted on the possibility of the two airlines to cooperate and possibly marge to form a single airline. In an interview with the Reuters, Tim indicated that Emirates was open to engage and potentially collaborate with Etihad in different aspects of their business. Although the full merger between the two airlines may be very unlikely, he added that such merger decisions could only be made by the owners of the two carriers.
As already noted, Emirates Airlines has its hub in Dubai. The airline belongs to the government of Dubai and subsidiary of the larger “Emirate Group.” The airline operates over 3600 flights every week and is hence the largest airline in the entire United Arab Emirates. The airline has operated for over thirty years and faces significant competition from Etihad. The decision to merge will be the right choice for the business if that decision will enhance the business’ cash cow and the star. Such a decision will be particularly viable if its effect will promote the airline’s cash cow into a star. According to the Boston Matrix model of analysis, a product is considered a cash cow if it holds a larger share in a market that is either not growing or is growing at a slow pace. In contrast, a star is a product holds a large market share in a market that is steadily growing.
This analysis will seek to answer the question as to whether the decision to merge is the right choice for decision makers within the two airlines. Secondly, the analysis will seek to outline the major challenges that the two airlines are likely to face both in the making of the merger decision as well as in the implementation of this decision.
Question 1: Is The Decision Two Merge Between Emirates Airline and Etihad Airline in the Best Interest of Both Airlines?
Internal Analysis : BCG
The possibility of a merger between the two airlines cannot be fully ruled out. However, the owners of the two airlines will have to evaluate significant factors before deciding on whether or not to merge their businesses. The two carriers have competed with the aim of building global networks for their respective airlines. Etihad has its hub in Abu Dhabi will Emirates have its hub in Dubai. Their major concerns in the recent past have been overcapacity, regional business travel fall, and airline security concerns (Westland, 2008). Therefore, whether the merger between the two airlines is the right decision for both depends on the individual circumstance of each of the airlines.
For the business of Emirates, economy flights are the cash cow of the business. The Emirates Airlines has a more significant market share in economy flights. However, the market in the economy flights has remained constant over a considerable period. The merger between Emirates and Etihad will have two effects on the economy flights. First, it will increase the market share since two main competitors will have brought their market share together (Campbell, Edgar, & Stonehouse, 2011). This will lead to the expansion of their overall market share. The effect of increased market share of a cash cow is that it will lead to an increase in revenue generated from this cash cow product and hence can be invested in promoting the star and consequently increase the overall bottom-line for the airline. Secondly, the merger will lead to the overall growth of the economy flight market because the combined resources of the two airlines will help in service delivery for the economy flights. Subsequently, it will attract more people to the economy flights and thus lead to the expansion of the economy market. From this perspective, the decision of a merger will be in the best interest of the Emirates business.
For the business of the Emirates, the Star product is the business flights and the first class flights. The business has a significant market share in the two products. Moreover, the markets of the two products are steadily growing for the Emirates’ business. Its merger with the Etihad Airways will result in a higher market share for these products due to the merging of the market share held by the two airlines (Prince & Simon, 2014). Consequently, the airline will be able to get increased revenue from this star product.
The question marks product in the business of Emirates is the Emirates Holiday. This product targets customers who wish to travel for holiday purposes. The Emirate airline holds a significantly low market share concerning this product. Moreover, the holiday travel market is relatively constant, and hence its rate of expansion is insignificant. Although Emirates has experienced significant losses after immensely investing in this product, the products still have prospects of growth. The major puzzle for the management of Emirates airline will be how to expand the market for this product and hence increase its productivity. The merger between the two airlines in question will help Emirates in its quest to expand the market for the holiday travel product and hence increase profitability for this product (Clougherty, 2011). From this perspective, the merger will be beneficial for the Emirates airline.
In contrast, the Etihad has the first class and business flights as the main cash cow. This means that while the airline holds a significant share of the market in this product, the market is relatively constant. Consequently, the merger will provide an opportunity for the market to grow (Westland, 2008). The combined efforts of the two airlines will bring about the economies of scale and hence the merger will be able to offer reduced prices for the two products. Consequently, the market for the first class and business class will grow steadily. From this perspective, the merger decision will equally be in the interest of the Etihad Airways business.
External Analysis: PESTLE
The evaluation of the appropriateness of the decision to merge for the two airlines will also depend on several external factors. Firstly, such a merger will be logical if it results in a more favorable political environment or influences such political environment (Campbell, Edgar, & Stonehouse, 2011). The political climate includes all government interventions such as tax policies, trade tariffs, and fiscal policies. Governments put in place such policies and measures to regulate business within their control. The merger between the two airlines will help them in building a favorable political environment in several ways (Barney & Hesterly, 2010). For instance, this merger will involve the two leading airlines within the United Arab Emirates. The combination of the two carriers will control a substantially great market share in the region’s aviation industry. Consequently, they will be the most significant taxpayers in the aviation industry. The enjoying of near monopoly will help the merger to have a strong bargaining power with the government in the United Arab Emirates. Therefore, the alliance will be able to influence fiscal policies as well as taxation policies that are favorable and hence increase their bottom line.
Secondly, the appropriateness of this merger decision must equally be evaluated from the view of its impact on the prevailing economic conditions as well as future changes that may occur in the economic conditions, which affect the individual businesses. External economic factors that affect businesses include inflation rates, economic growth patterns, and foreign exchange rates among others (Westland, 2008). The decision to merge Emirates Airlines and Etihad Airways would be rational if it helps them to maneuver the prevailing economic challenges more effectively or if the merger influences such economic conditions. For instance, Etihad’s profits dropped by S$ 1.87 billion in 2016 despite the sustained passenger and cargo revenue compared to its performance in 2015 (Etihad Airways reports a net loss for 2016). The same can also be seen from Emirates whose profits dipped by $340 million in 2016 compared to the previous year (Kerr, 2017). The merger will help them to maneuver the financial problems in different ways. For instance, the merger will help them maneuver the problem of inflation both in the present and in future (Campbell, Edgar, & Stonehouse, 2011). Inflation affects the customer’s ability to afford flights and hence reduces the number of customers for both airlines and will reduce their revenue significantly as was the case during the great recession.
However, the merger will help the two airlines to benefit from economies of scale collectively. Consequently, the merger will help the combined airlines to offer reduced prices for their flight products during the times of inflation while still maintaining a level of profitability. Therefore, more people will be able to afford their flight products, and hence this customer base will remain the same (Barney & Hesterly, 2010). This way, the merger will have helped maneuver the economic challenge of inflation. From this perspective, the alliance will be beneficial for the two airlines, and the decision will be rational.
Moreover, this merger will have a positive impact for the two airlines from a technological perspective. It is imperative to note that the aviation industry is mainly dependent on research and technological improvements. Airlines that can continuously improve their technologies in both the safety, as well as efficiency aspects of their operations, will attract more customers. The combination of the two airlines will bring together resources required for research as well as technological advancements that were previously a limitation for each airline. Consequently, the merger will most likely enjoy a higher technological advantage than what the individual airlines currently enjoy (Campbell, Edgar, & Stonehouse, 2011). From the technological perspective, the merger will be of great benefit for the two individual airlines, and therefore, the decision to merge is rational for both airlines.
From a legal perspective, the major will come with both advantages and disadvantages. The major benefits will be that the major will provide more resources required for compliance with existing legal requirements such safety requirements, labor laws and consumer laws. For instance, the merger will bring together resources that are necessary for the purchase and installation of advanced safety systems in the aircrafts and hence help the airlines to comply with the safety laws (Barney & Hesterly, 2010). However, the major legal hurdle will be the approval of the competitions management boards. Such a merger may be viewed as the creation of a monopoly and may not be approved by the relevant competition authorities.
Question 2: What Challenges Might the Two Companies Face for Such Merging and how Will They Overcome These Consequences?
The top management of both airlines is likely to face several challenges in determining whether to merge or not. The first challenge will be the determination of the value that each airline gets from the merger. For the major to be important, it must add significant value to the existing business (Campbell, Edgar, & Stonehouse, 2011). A merger will not add value or enhance market leadership should not be pursued. While supporting and approving this merger, the management will need to evaluate whether the merger adds significant value to their operations and profitability of the airlines. In over overcoming this challenge, the control of both airlines must carry out due diligence the limitations of their airlines in profitability and the value that the merger adds concerning overcoming such barriers.
Secondly, the airlines must determine if the merger brings together resources that are rare and hence help improve the competitive advantage of the alliance. In this determination, the airline must examine the resources that the other party brings regarding their uniqueness. If such resources are unique, the party should embrace the major (Barney & Hesterly, 2010). However, if they are not, then the resultant merger will create competitive parity, and hence it will not be worthy to merge.
Thirdly, the merger must determine if it is costly to imitate such an alliance or the resultant collection of resources. Lastly, the senior managers will face the challenge of organizing the merger in a way that cultures the value in each airline and hence results in a more significant collective value. In overcoming this problem, each carrier must understand its strengths and weaknesses as well as the strength and weaknesses of the other party. Therefore, the major must be in a way that it maximizes the power of each airline while complementing each other to eliminate the weaknesses (Campbell, Edgar, & Stonehouse, 2011). Consequently, the resultant merger will be stronger than each airline currently is and will hence be more competitive.
| Resource | Valuable? | Rare? | Costly to imitate? | Capable of being exploited? |
Evaluation: Competitive implications (the extent to which the resource gives a long-term competitive advantage) |
| Customer Service | Yes | Yes | No | Yes | Sustainable long-term Advantage |
| Pilots | Yes | No | Yes | Sustainable long-term Advantage | |
| Fly attendant | Yes | No | No | No | Temporary Competitive Advantage |
| Engineering | Yes | Yes | Yes | Yes | Sustainable Long-term Advantage |
| Marketing | Yes | No | No | Yes | Temporary competitive advantage |
| VRIO factor | Description |
| Valuable | Under this factor, a resource must add value to give the organization competitive advantage (Hill & Jones 2008). This analysis evaluates if the merger decision adds value for each airline. |
| Rare | Rare resource helps the organization to be competitive while resources that are not rare create competitive parity (Hill & Jones 2008). Under this factor, this analysis evaluates whether the merger between the two airlines is unique and if it brings unique resources that create competitive advantage |
| Costly to imitate | Resources and strategies that are costly to imitate create competitive (Hill & Jones 2008). The analysis evaluates how the merger is costly to imitate and hence can give both airlines a competitive advantage. |
| Organized | The organization of resources helps the companies to take advantage of them in a way that adds competitive advantage. This analysis evaluates how the merger will organize resources in a way that creates a competitive advantage for both individual airlines. |
PORTERS’ Five Forces
Some external factors may equally pose a challenge to the management of both airlines in deciding whether to merge or not. Firstly, the resultant competitive rivalry will pose a problem in this decision (Sheehan & Foss, 2009). In overcoming this problem, it is imperative that the management of both firms evaluate of other companies in the industry may pose significant rivalry and hence create more competition for the merger that would render it ineffective in gaining competitive advantage. Secondly, each airline will face the challenge of determining if the merger presents a higher supplier power. Suppliers affect the business sins their pricing and quality of their supplies has a direct bearing on the quality of the business products as well as how the business prices their products (Sheehan & Foss, 2009). In overcoming this challenge, the management of each airline will determine to what extent the merger presents a possibility of influencing suppliers.
Thirdly, each airline will be faced with the determination of how the merger will help in influencing the buyer power. The buyer power benefits the customers in determining the prices of the products. Therefore, the airline management will learn how the merger helps them check buyer power. Lastly, the management of the two airlines will face the challenge of determining how the merger helps in preventing new entry into the market (Sheehan & Foss, 2009). New entrants have the effect of bringing about competition to the existing business. Therefore, the individual airlines must be sure that the merger will prevent any new entry into the industry before committing to such alliances.
Overall, the merger between Emirates and Etihad will be of great significance to both airlines. Ideally, the merger will provide an opportunity for the two carriers to move their cash cow products into star products as well as enhance the profitability of their star products. Moreover, the merger will create an opportunity for the Dog products to become cash cows. Furthermore, the merger will give individual airlines several external advantages such as technological competency, ability to maneuver hash economic conditions among others.
References
“ Etihad Airways reports a net loss for 2016.” https://www.etihad.com/en-us/about-us/etihad-news/archive/2017/etihad-airways-reports-net-loss-for-2016/
Barney J.B. & Hesterly, W.S. (2010). Strategic Management and Competitive Advantage: Concepts and Cases (4 th Edition). Upper Saddle River, NJ: Pearson.
Campbell, D., Edgar, D. & Stonehouse, G. (2011). Business Strategy: An Introduction . Basingstoke: Palgrave Macmillan.
Clougherty, J. A. (2011). The International Drivers of Domestic Airline Mergers in Twenty Nations: Integrating Industrial Organization and International Business. SSRN Electronic Journal, 223-234.
Fig 1: McCartney, S. (2014). Emirates, Etihad and Qatar Make Their Move on the U.S. The Wall Street Journal. https://www.wsj.com/articles/emirates-etihad-and-qatar-make-their-move-on-the-u-s-1415226589
Fig 2: CAPA. (2016). Emirates Airline: The strategy reshapes in 2016 – partnerships, China growth, smaller widebodies. Retrieved November 27, 2017, from https://centreforaviation.com/insights/analysis/emirates-airline-the-strategy-reshapes-in-2016-partnerships-china-growth-smaller-widebodies-260221
Fig 3: CAPA (2016). Gulf 3 airline growth: Emirates steady, Qatar Airways accelerates & Etihad Airways slows. https://centreforaviation.com/insights/analysis/gulf-3-airline-growth-emirates-steady-qatar-airways-accelerates--etihad-airways-slows-275457
Hill, C.W.L., and G.R. Jones (2008). Strategic Management Theory: An Integrated Approach, fourth. Boston: Houghton Mifflin.
Kerr, S. (2017). Emirates airline’s profits plunge after ‘destabilizing events.’ Financial Times. https://www.ft.com/content/780665f6-3629-11e7-99bd-13beb0903fa3
Kumar, N. (2006). Strategies to fight low-cost rivals. Harvard Business Review, 84 (12): 104-113.
Pontus, D. (2015). Flights of fancy Flights of fancy Strategic partnerships bring success for Etihad Airlines. Strategic Direction, 31 (2), 22-24.
Prince, J., & Simon, D. H. (2014). The Impact of Mergers on Quality Provision: Evidence from the Airline Industry. SSRN Electronic Journal, 3 (2), 126-134.
Sheehan, N. T., & Foss, N. J. (2009). Exploring the roots of Porter's activity-based view. Journal of Strategy and Management, 2 (3), 240-260.
Westland, J.C. (2008). Global Innovation Management: A Strategic Approach. Basingstoke: Palgrave Macmillan
